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Tencent Buys 4 Percent of Internet Cafe Software Giant Shunwang for 130 Million RMB

Late Wednesday, Chinese internet giant Tencent (HKG:0700) announced that it had purchased a four percent stake in internet cafe software platform provider Shunwang for 130 million RMB ($20.4 million), valuing the company at about $500 million Tencent Director Liu Chiping said of the deal, “We’re very happy to have founded close strategic relations with Shunwang, and we hope to engage in deeper cooperation with them through bilateral use of [our] communities, games, videos, and other entertainment products, help net cafe users immediately find more internet apps and content, and provide them with the service that allows them to conveniently enjoy this content.” Shunwang was founded in July 2005. After just three years, it claimed to provide its software service to over 93,000 Internet bars and have at least 46 percent market share in the industry. Its Internet bar management software, iCafe8, follows a freemium model. Internet bars can use the software for free but have to pay for premium service such as automated and safe upgrading of games, financial management tools, and advertisement revenue.

Shunwang also has two other products: a media and advertising platform (for ads selling) and a digital entertainment marketplace. While the internet cafe is still a viable business in China, it’s a bit difficult to understand what Tencent’s strategic intentions are here (except for pure massive distribution through Internet cafes), as net cafes are slowly being replaced as users turn to tablets and mobile phones to access the internet from anywhere. As China’s economy develops and these devices become more affordable to Chinese consumers, it’s likely fewer and fewer people will turn to internet cafes. It’s tough to imagine that in ten years’ time internet cafes will be as prevalent in China as they are now. On the other hand, the net cafe’s primary customer — students who want to play games away from the watchful eyes of parents and teachers — aren’t likely to go anywhere, and it’s possible that Shunwang has plans to expand their platform into other areas of computing rather than keeping it limited to net cafes. Only time will tell!